What are Hedge Funds Investing in? Track them Using 13F Filings

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Picking stocks can be a daunting process, even for active traders. It seems like no matter how much research you put in, there’s no way to beat the professionals. While it may be true that, short of investing millions in a hedge fund there’s no way to invest alongside the greats, it turns out that you can track their positions through 13F filings.

13F Basics

Each quarter, all institutional money managers with at least $100 million invested in qualifying securities (essentially all NASDAQ-quoted stocks, equity options and warrants, shares of closed-end investment companies, and ETFs) are required to file a 13F report with the SEC.

The report must list every security which meets either of the following criteria:

  • The institutional money manager holds at least 10,000 shares
  • The market value of the position is at least $200,000

The only exceptions are short positions and foreign securities that are not traded on a U.S. exchange (so ADRs must be reported).

Why Should I Care?

Every major hedge fund in the U.S. must file a 13F report, which inspires many active investors to track the positions of famous fund managers. Though you have to wait until the report is filed, it’s significantly easier to copy the investments of Warren Buffett and David Einhorn than to raise the money needed to invest in Berskshire Hathaway or Greenlight Capital.

Regular investors should also stay aware of trends amongst institutional investors. In 1980, 28% of outstanding U.S. equities were held by institutional investors, but by 2009 institutional ownership had grown to 51%, according to NYSE data.

Long-term investors have good reason to follow hedge fund positions as well. A recent study from Imperial College London, commissioned by KPMG, demonstrated that hedge funds significantly outperformed equities, bonds and commodities between 1994 and 2011. Even after fees, hedge funds managed to return an average of 9% per annum.

Drawbacks

According to Stephen Taub at Insitutional Investor, there are three primary drawbacks to following 13F filings:

  1. Hedge funds don’t always make smart decisions. In 2012, for instance, 88% of hedge funds underperformed the market and approximately 635 had to close due to poor returns.
  2. The positions reported may be significantly outdated. 13F reports don’t have to be filed until 45 days after the end of the calendar quarter. Unless you’re looking for long-term investment trends, data that old carries significantly less meaning.
  3. A hedge fund can temporarily hide a position until it has finished purchasing or selling shares. So long as the hedge fund files an amendment within a reasonable period, a position doesn’t have to be reported on the initial filing.

Change on the Horizon

On February 1, NYSE Euronext filed a petition with the SEC to shorten the 13F filing period to two days. The reasoning is that reporting technology has advanced dramatically since the 13F rule was adopted as part of the Securities Acts Amendments of 1975, and that shortening the wait period would be helpful to both investors and institutions. The petition was supported by the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute.

What does this mean for investors? If you’re interested in following or imitating the trades of hedge fund managers, having access to recent data means that you can more closely track the portfolios of winning hedge funds. And if you prefer to simply track institutional investment trends (because, let’s face it, institutional investors are incredibly influential to the market) your data will be closer to real-time than ever before.

 

 

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